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An Introduction to
Supply Base Management

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Preface
Reducing an organisations
supplier base is often a key
aim of any procurement
professional in a new role.
It is always assumed, if not
always proven, that aggregation
is right and less is more when
it comes to the long tail
of suppliers most large
organisations develop.

But in an increasingly complex world, with an ever

growing number of exogenous influences on the
organisational agenda, we can no longer assume
that the standard approach is always the right
approach. Performance optimisation is the
new mantra. Getting the right solution for you
organisation is more important. Aligning the
objectives of the procurement strategy with the
goals of your organisation is the correct first step.
Having these in tune will lead to developing the
right strategy for your business.
It is no longer the case that less is automatically
more. There are times when a broader supplier
base is right for youfor example to spread risk
or even for socially responsibility reasons. Although
there are surely times when the old way is also
still the best way. But sitting down and thinking
through what is really needed is always the right
first step.
Jonathan Dutton

Managing Director
CIPS Australia

Preface

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Introduction
Abstract
This paper provides an
overview to the discipline of
identifying the appropriate
number of suppliers
required to support
business needs and
drivers, referred to as
supply base management.

In economics, competition is seen as an important

process for achieving the most efficient allocation
of scarce resources. In the business and consumer
worlds the interaction and competition between
buyers and sellers is considered essential in these
markets, as a mechanism for the production of new
products, services and technologies at affordable
prices. So important has this concept become in
the modern world, that international bodies such
as the World Trade Organisation (WTO) and the
International Chamber of Commerce (ICC) in the
UK have evolved to negotiate the reduction of trade
barriers and to stimulate competition between nations
with the objective of achieving the most efficient
use of resources; a process often referred to as
globalisation.
While there are many observed benefits of competing
trade and business between different countries, it
must also be acknowledged that extreme competition
between countries can lead to negative consequences
such as trade wars, protectionism, and even the use
of military power to obtain access to resources.
Again world organisations such as the United Nations
have been created to try to reduce the consequences
of such excessive competition. The antithesis of
competition is cooperation, where groups voluntarily
agree to work towards a common goal instead of
relying on competition and self organising markets
to achieve their objectives.

Introduction

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There are also international

and national regulations which
attempt to create a level playing
field. An example in the area of
economics and business would
be the Kyoto Agreement, where
a significant group of nations
have agreed to put in measures
in place to reduce greenhouse
gas emissions that mainly
emanate from economic and
business activity.
Just as too much competition
can have the negative results
as mentioned above, so can too
little, perhaps as a result of an
over reliance on cooperation,
or more often from inertia or
support by governments for
perceived national interests.
Hence, the European Union
has produced competition
laws that seek to stimulate
competition in key economic
areas.

Introduction

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Although governments and supra-national bodies

produce regulations, in free economies it is the
individual businesses and the buyers employed
by them, that have to balance competition and
cooperation in the best interests of the organisations
stakeholders. At a business level, competition is often
viewed in a very specific way, and there is a tendency
to focus on the volume of suppliers providing an
organisation its goods and services. A competitive
market place is a good thing, it brings with it the
opportunities for better quality and improved
prices. A professional buyer knows that poor business
processes and maverick purchasing can swell the live
supply base records making it appear to have many
live suppliers and so may try and reduce the volume
of suppliers. Organisations typically set targets for
reducing the supply base, based on the mistaken
notion that this in itself represents best practice;
a real example of which is a large local authority
which shows 22,000 live vendors, but where there
are only 800 truly authorised suppliers. However, the
real issue that any organisation needs to address is: What is the appropriate numbers of suppliers
required to support our business needs
and drivers.

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The CIPS Position

CIPS practice guides are
designed to provide awareness
and a level of understanding to
the reader on selected topics.
In this case on the use of
competition and supply base
reduction. They are written for
specific use of those interested
in business issues as in general,
and purchasing and supply
management (P&SM) issues
in particular. This will include
full and part time P&SM
professionals as well as
individuals interacting with
P&SM activities.
The CIPS guide will also include
information on the contextual
background of the issues, and
will give a balanced opinion on
those issues that the reader may
wish to consider. There will also
be references to other sources
of information. Most Knowledge
Works documents will contain
CIPS position statements, that is,
CIPS' view(s) on the documents
subject matter. The CIPS views
are arrived at using extensive
consultations with P&SM
practitioners and people
with expertise relevant to the
subject. This includes working
knowledge groups and the CIPS
Policy Advisory Network (PAN).
Following the consultation
process the CIPS Councils
Key Practice Statements Group
finalise the statements.

CIPS position on Supply Base Management is:

The

discipline of identifying the appropriate

number of suppliers required to support our
business needs, and drivers should be referred
to as Supply Base Management.

Supply

Base Management is an output of

strategic procurement activity.

Supply

Base Management is managed by

procurement professionals interacting with and
seeking guidance from other functions within
the organisation.

It

is an element of the purchasing functions

role to look at supplier/market development.

The

importance of analysing the supply base

must not be under estimated identifying
purchasing requirements and the internal
customers requirements from the supplier(s)
is the priority activity.

Competition

in the tender process helps to achieve

competitive pricing, but the decision as to how
many suppliers to take to contract stage must be
given careful consideration bearing in mind the
companys strategy for that category.

Supply

base reduction as an end in itself is not a

good thing, and buyers should be encouraged to
identify the right number of suppliers for a given
situation.

The

treatment of unsuccessful bidders should be

conducted openly, fairly and transparently as this
will reap possible future benefits.

Sustainable

procurement considerations including

Corporate Social Responsibility (CSR) must not be
overlooked.

The CIPS Position

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Definition and Explanations

a) Competition
There will only be competition
in a market place if there is
sufficient and sustained demand
for a product or service to create
more than one supplier.
Competition for the buyer could
therefore be defined as having
many options, choices and
alternatives of supply. The
supplier base is encouraged to
deliver value to the customer
when the market is subject to
competition, such as better
service, faster delivery, improved
quality and innovation for a
lower cost.
The professional buyer must
understand the competitive
nature of the market into
which he is buying and also
his attractiveness as a customer
to that market. For example
a buyer with a high level of
sustained demand/spend will
be more attractive to suppliers.
The buyer must remember
that there is competition from
suppliers who will be competing
to supply you as a customer but
that you are also competing with
other buyers for that supply
(you may be in a buyers or
sellers market).

It is the buyers responsibility to increase, or at least

not to reduce competition, by using a considered
methodology to evaluate and select those suppliers
that are right for your organisation.
There is also a wider consideration in that what is
right for the organisation may not always be right
for the market in the longer term. For example,
multi-year framework agreements may force other
suppliers to move out of the market over time, or
leave you with less choice when you come back
to the market later.

b) Supply Base Management

Supply Base Reduction sometimes referred to as
Supplier Reduction can simply be thought of as
reducing the supply base.
The authors of this paper feel that Supply Base
Reduction as an end in itself is not a good thing and
buyers should be encouraged to identify the right
number of suppliers for any given situation. A good
tool to use is Peter Kraljics model which looks at
supplier positioning.1
The model provides a framework for an organisation
to assess its vulnerability in the supply chain as well
as identifying strategies as to how to prevent them.
The principal tenet in this model is that organisations
must first analyse and classify all the purchases in
terms of profit impact and supply risk. The supply
position is then identified within the model, the
strategies and action plans are then devised.
Generally, this model is used to identify the type
of relationship an organisation may have with its
supplier, and it can also be a valuable model for
identifying the structure of the supply base, and
thus how many suppliers are needed for each
specific product.

Peter Kraljic Purchasing should be Supply Management Harvard Business Review 1983

Definition and Explanations

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We have adapted this model

in order to show clearly what
we mean by this. The two
dimensions of the model, as
shown below, represent both
internal and external factors.

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The y axis represents the strategic importance of

purchasing in terms of the value added by product
line and the resources required during the purchasing
process i.e. time, and money. The x axis represents
the complexity of the supply market such as supply
scarcity, pace of technology and/or materials
substitution, entry barriers, logistics cost etc.
Too few suppliers can be just as problematic as too
many suppliers. For example, an organisation may
find that it has to grow its supplier base in say, a
monopoly situation.

Allocation of purchasing resource

High

Leverage:

Strategic:

Materials Management
Typical length of relationship:
12-24 months months Typical
no. of suppliers per product:
One or two, depending on
size of supply base

Supply Management
Typical length of relationship:
Long term e.g. up to 10 years
Typical no. of suppliers per
product: One, due to long term
strategic direction and need
for relationship building

Non-Critical:

Bottleneck:

Purchasing Management
Typical length of relationship:
12 months months or less
Typical no. of suppliers per
product: Many, switching
costs low

Sourcing Management
Typical length of relationship:
Variable depending on
availability & flexibility of
supply base Typical no. of
suppliers per product: Dual
source due to critical nature of
product and scarcity of supply

Low
Low

Complexity of Supply Market

High

Figure 1: Adapted from Peter Kraljics Model first shown in the Harvard Business Review September/October 1983 article entitled
Purchasing should be supply management page 111

Definition and Explanations

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The buyer should assess each

situation and identify the
optimum number which would
provide the critical mass of
suppliers which would best
support the business. Indeed
each discreet purchasing spend
area (category) has its own
optimum number of suppliers,
depending on the changing
circumstances of the both
the market and the buyers
organisation.

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Spend categories will vary from one organisation

to another. Using a simple example, an organisation
could source independently for pencils or they
could bundle pencils into a stationery contract. The
decision to buy pencils independently of paper as
against a decision to buy stationery as a single
category, will have big implications for the optimum
number of suppliers. The stationery decision, for
example, may remove all independent manufacturers
of pencils and paper and leave the organisation
dealing only with distributors. Either of these options
of sourcing may be appropriate depending on the
circumstances.
Another example may be the building of a new
school. The decision you make will have an impact
on the amount of suppliers in your supply base.
If you include the provision of fixtures and fittings,
mechanical and electrical services, security services
etc within the contract, this will restrict the tender
to only those suppliers specailising in turnkey or
management projects and potentially reduce your
supply base.
The argument here is clear in that the external source
is better at managing the procurement (aggregation,
sourcing, tender process, evaluation etc.) than the
buyer is likely to be. If this is not the case, then
transferring might leave the number of suppliers in
the supply chain exactly the same, meaning that there
would be an additional layer in the chain. Potentially,
all the costs associated with multiple transactions/
suppliers have been passed to a third party. There
has to be a convincing offset for this to make sense.
Buyers should not assume that reducing in this way
is always an improvement.

Definition and Explanations

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Context
In recent years, there has been
pressure on organisations to
reduce their total number of
suppliers as part of cost
reduction programmes. This has
resulted in large scaled supplier
reduction programmes in both
the public and private sectors.
Working with a single supplier
may yield tremendous efficiency
benefits without reducing any
sense of external competitive
pressure. Consolidating
suppliers also reduces the cost
of managing suppliers separately,
but equally it should be borne
in mind that if competition is
reduced by buying everything
from one supplier then this
might result in prices going up
in the medium term.
In the past, organisations
undertaking a supplier reduction
exercise often followed up
with a supplier development
programme. Key suppliers were
encouraged to commence
initiatives such as Total Quality
Management (TQM), zero defects
and cost reduction programmes,
including waste reduction in
stock holding, movement,
manpower etc.. In some cases
this resulted in the development
and (possible over) reliance on
one supplier to supply a good
or a service. This shows how
important it is to get the
strategy right.

It is essential that the professional purchaser keeps

themselves up-to-date with market knowledge and
trends to ensure that the right decisions are made.
A special case of supply base reduction and single
sourcing is supplier tiering. This is a process whereby
a reduced number of strategic suppliers, tier 1, are
responsible for managing a number of other suppliers,
tier 2. This management responsibility passes
upstream through the supply chain, in theory
making it easier to manage the supply chain.
Some organisations use a model of sourcing called
the network sourcing model. In effect every part
sourced have 2 suppliers although the supply is
usually split to something like a 60/40% or 70/30%
split to the preferred supplier. This keeps an element
of competition in the process, whilst allowing both
suppliers to be considerably developed to meet
the organisations requirements. This approach to
sourcing has been cited in the automobile sector
and in manufacturing mainly as a means of preventing
vulnerability in the supply chain.
In general, there is an acknowledgement that
competition is one of the main contributors in driving
the economy and has resulted in giving purchasers
greater choice.
Decisions in the public sector are heavily regulated in
the area of encouraging competition. This includes
private organisations carrying out business on behalf
of the public sector i.e. third party service providers.
EU guidelines have an implicit view that competition
is desirable and this is achieved through a competitive
tendering process.

Context

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The focus is increasingly on

managing the supply base as part
of a programme of continuous
improvement. This can be
achieved through collaborating
with key suppliers at a strategic
level. Known as strategic
supplier management, it is
becoming a core business
activity bringing greater value
for money for the buyer and
enhanced profit margins for the
supplier. The buyer and supplier
co-ordinate a programme of
different actions in order to
integrate their businesses. This is
not sole sourcing or outsourcing,
but rather a means to align long
term planning which brings
about strategic benefits such
as market penetration, market
growth and product
development.

10 Context

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There is a balance to be met in encouraging

competition between suppliers and developing
preferred suppliers. Consideration should be given
to those suppliers which provide a first class service,
and cost very little to manage. Why remove them
from your supply base for the sake of consolidating
supply to one large supplier or distributor? There
may be a good reason to do so, but ensure that this
decision is made based on your business plan.
Interestingly, after some years when only cooperation
was seen as good and any competitive procurement
was referred to as adversarial or bad, many higher
performing procurement operations are now using
a better balance of approaches. An analysis of the
market and supply position allows a better informed
decision to be made as to whether to adopt a
multi-source adversarial strategy or a collaborative
strategy with long term relationships or any strategy
in between.

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What are the drivers and benefits of supplier

base reduction and increased competition?
Some of the benefits for
reducing the supplier base are:

The real business benefits to the organisation of

reducing the supplier base are:

Reduced

More

overhead costs
of maintaining databases
and managing supplier
performance.

concise reporting.

More

effective supplier relationship management

including agreement of contractual terms often
ignored where supplier numbers are excessive.

Supporting

the aggregation
of spend to fewer suppliers
thus increasing leverage and
lowering prices.

Aiding

the reduction of
multiple competitive
tendering and thus assisting
the reduction of transaction
costs. The fewer suppliers
included in the tender process
= the fewer tender evaluation
and clarification exercises.

Greater

control of suppliers and buying processes.

Improved

supplier performance as a result of

increased time available per supplier to monitor
and manage performance.

Aggregation

of spend resulting in greater

attractiveness as a customer.

Increased
Lower

competition for your custom.

overhead costs of purchasing.

Of course, reducing the supply base is not a panacea

and as already mentioned it may be the right option
to increase competition.
The benefits for increasing competition are:
Reduced

prices.

Improved

innovation, quality, lead times and service.

The business benefits are:

Lower

overall prices.

Suppliers

working for your business.

Improvements

in supplier performance as each

supplier works harder to maintain their share of
your business.

Suppliers

come to you with innovative products.

What are the drivers and benefits of supplier base reduction and increased competition?

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Supplier reduction,
rationalisation or optimisation
The terms supply base
reduction or supplier
reduction, tell us immediately
what the objectives are, but
what does rationalisation or
optimisation actually mean?
During your category analysis
you may discover that you have
far too many suppliers for the
level of available spend, and
you may wish to simply remove
suppliers from your database.
Some simple filters could be
used to identify the suppliers
you want to remove from your
supplier base such as level of
spend,numbers of orders etc.
This process is a rationalisation
rather than simply a reducing
of the supply base.
A data cleansing exercise should
clean up a database considerably
before any active consolidation
and reduction takes place. Many
suppliers can be eradicated
quickly and easily from supplier
databases as they may have only
ever been used once in the past,
or they may have possibly been
entered several times within the
system as the same supplier.
There is a cost associated with
the management of each supplier
within a system, so this simple
task can make a substantial
impact on administrative costs.

If this action is taken then it needs to be well

communicated to the stakeholders and in particular
the business users. Clear instruction must be given to
them as to what they must do whilst you are working
on a longer term solution and a more comprehensive
sector (category) review is completed. Also when the
communication process has taken place, the suppliers
should be removed from the supplier file and a
process should be initiated which highlights any
transgressions and outlines the consequences for
continued non compliance.
It is always worth remembering that promoting
effective healthy competition in supply chains is
usually beneficial. It can lead to positive tension in
the supply chain which in turn should promote
increased performance and innovation. If you find
that you are in a market sector that is constrained,
with few suppliers who have dominant positions and
are exploiting that dominance, due to issues such as
being a technology leader or holder of key intellectual
property, one's strategy should then be to promote
competition and develop alternative competent
suppliers. In this scenario, you should find that you
are not reducing.,but in fact, growing your supply
base.
Supplier reduction is a means to an end, it can create
greater efficiency and effectiveness. Questions such
as what is the right level of supply base for your
business? should be driven by objective analysis.

12 Supplier reduction, rationalisation or optimisation

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The Risks
The following is a list of some of
the likely problems which may
result from trying to reduce your
supply base:

The following are general risks relating to the supply

base:
Suppliers

may avoid competition by creating

cartels or colluding in other ways.

Focusing

on supplier base
reduction as a KPI could overly
reduce your supply base.

If

not managed properly by a

professional purchaser, single
sourcing can lead to supplier
complacency and in turn to
reduced performance.

Lack

of understanding of the market and ability

to refresh knowledge.

Reciprocal
Conflicting

policies eg, corporate social

responsibility (CSR) , diversity etc, may restrict
ability to act.

Beware

Branded

Concentrating

Missed

of collusion between
suppliers if you reduce your
supply base to two or three.
too greatly on
supply base reduction might
restrict time that can be
better spent on supplier
development.

trading restricts competition.

specifications will reduce competition.

Problems which may result from focusing too
much on increasing competition.
opportunities to aggregate spend by
increasing demand and attractiveness to the
supply base.

Could

result in monopolies
and anti-competitiveness

Reluctance

to write off shared

investment in resources
between buyer and supplier.

Buyer

inertia to resource
a product or service.

risk of non-compliance in
the public sector with anticompetitive regulations.

May

focus too much on the

process of reduction rather
than the strategic priorities.

The Risks 13

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Hints and Tips

Knowing

the needs of the

internal customer is an
essential part of ensuring
supplier usage. There are
plenty of examples where
the procurement team finds
a supplier which the internal
customer found unsuitable.
Often this unsuitability is not
specifically explained, but is
demonstrated through lack of
supplier usage. Make sure you
understand your customer.

The

buyer should implicitly

'regulate' the marketplace
ensuring that not too much
work is placed with one
particular supplier.

Ensure

that the tendering

process follows any agreed
strategic position. For
example, if tendering is based
on a sole supplier arrangement
which is linked to volume, then
diluting the volume by having
say, two suppliers instead of
one can create lack of trust by
the supplier from the outset. It
also means that the suppliers
price may be incorrect.

Giving

a full debrief to
unsuccessful bidders may
help them in future to provide
a better bid. This also increases
the viable competition for your
organisation.

Look

for opportunities to benefit from consortium

arrangements. Ensure compliance with the relevant
legislation and regulations e.g. EU rules, internal
regulations.

Purchasing

departments have the ability to change

the characteristics of the market place by their
buying power. Irrevocable changes can occur
through lack of total understanding of the wider
picture. It is an imperative for the purchasing
department to engage with the entire supply
chain to discuss such changes thereby ensuring
that an organisations dominant position in the
relevant buying market does not become an abuse
of that position. This would lead to the risk of
disappointed suppliers reporting the company to
the Office of Fair Trading, and consequent fines.

Be

careful that you are not over protective of

suppliers because they are local, but also recognise
that there are sometimes advantages in terms of
value for money and sustainability in doing business
with smaller and less local / more diverse suppliers.

Ensure

that you meet all the requirement

of EU rules and regulations.

It

is important to use a suite of completely objective

criteria in the selection of the supplier. The name
and size of the organisation should, in a sense, be
irrelevant, provided the capacity criteria are met.
An assessment of quality of service should form
part of the assessment process. Relationships and
procurement strategy should ideally be based on a
combination of factors reflecting the nature of each
purchasing area, including: risk, complexity, value,
the general market and basic matters of supply and
demand.

Carefully

weigh the length of the contract and the

potential benefits of a long-term relationship with
the ability of the buyer to exit from the relationship.

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Hints and Tips

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Summary
Both too few or too many
suppliers can be problematic for
an organisation. The purchasing
function has a role in developing
an appropriate approach to
supply base management
depending on the category of
purchase i.e. high value/ low
value or high risk/ low risk.
The right approach decision
requires a close working
relationship with other
stakeholders, and in particular
the identification of internal
customers needs.
It is important that any approach
adopted is in accordance with
your organisations procurement
rules; these could include EU
rules and financial authority
levels. It is important that a
fair and transparent process
of procurement is employed
and competition is encouraged
wherever appropriate.
The key to choosing the right
approach is having a good
understanding of the business
environment, both inside and
outside the organisation, then
the purchasing professional can
make the right decision as to the
appropriate number of suppliers
required to support their
organisations business needs
and drivers.

Further reading and references

Purchasing and Supply Chain Management, Kenneth
Lysons and Brian Farrington Seventh Edition ISBN
0-273-69438-3 Chapter 11 Sourcing and the
Management of Suppliers.
Purchasing Principles and Management, Peter Baily,
David Farmer, David Jessop and David Jones Ninth
Edition ISBN 0-273-64689-3 Chapter 8 Source
Decision Making.

About the Author

Ian Schollar is presently the Head of Procurement
Practice at CIPS and has particular responsibility for
the Public Sector within the Professional Practice
Team. He is responsible for developing the CIPS
position in this area and providing relevant guidance
and support to this sector.
Ian joined the CIPS Professional Practice Team at
Easton House in the UK in 2005, although he had
already had a long association with the Institute.
He was a founder examiner for the CIPS Certificate
Level qualification and also taught the CIPS Graduate
Diploma at Croydon College for a number of years.
He has worked in a wide range of procurement
roles, predominantly within the UK public sector.
He has also worked in development roles to build
the procurement capability of both private and
predominantly public sector officials across the
world. He has also worked in Africa, the Middle East,
Central Asia and Eastern Europe.

Summary

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CIPS Australia Pty Ltd

Level 10, 520 Collins Street, Melbourne, Victoria 3000, Australia
Tel: 1300 765 142 Fax: 1300 765 143
International Tel: +61 3 9614 2333 Fax: +61 3 9620 5488
Email: info@cipsa.com.au Web: www.cipsa.com.au